What Liabilities are Sole Proprietors Subject to?

by Wayne Thomas
A sole proprietor and the company operate as one.

A sole proprietor and the company operate as one.

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Getting a business moving forward without a lot of red tape is often the goal of eager new business owners. In the early life of a company, operating as a sole proprietor can make the most sense due to ease of setup. This business structure generally requires no formalities and is under the complete control of the owner. Yet, with this control comes a personal responsibility for the debts and legal liabilities of the company. In fact, creditors can include the personal assets of the owner to satisfy an outstanding debt, which can even impact the property of a spouse having little or no contact with the business.

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Overview

A sole proprietorship is perhaps the most straightforward and easiest business structure to create. Aside from certain licenses and permits associated with particular industries, an owner need not take any additional action other than start business operations to be organized as a sole proprietor. The business and the owner share the same name and are treated as one, with all responsibilities starting and ending with the owner.

Personal Liability

While the owner of a sole proprietorship retains complete control over the operations of the business and can enjoy all profits, he also signs on for all of the debts and legal obligations undertaken by the company. The owner is personally liable for everything that happens with regard to the business.

Vulnerability

If the business fails to timely pay a debt or undertakes action that leads to a legal judgment against the company, the judgment creditor can satisfy the debt with both the assets of the business and the personal assets of the owner. Personal liability also extends to injuries sustained by customers or the public during business operations, or with regard to injuries from defective products produced by the company. Outstanding debts and judgments also will show up on the credit report of the owner and can make it difficult for him to obtain personal lines of credit in the future.

Impact on Spouse

Because an owner is personally liable for the debts and obligations of the business, any assets shared jointly with a spouse may be affected. This rule applies even if the spouse can prove that he did not have any personal contact with the business. Specifically, assets shared jointly that could be subject to a collection action include, but are not limited to, an automobile, joint savings or checking account, or home.